2.17.2016, 9:04:00 AM

About two weeks ago, the popular Sunday evening investigative journalism program, 60 Minutes, aired a segment with Steve Kroft which purported to show “what happens when hidden cameras capture New York lawyers being asked to move highly questionable funds into the U.S.” In short, CBS broadcasted video evidence that 15 out of 16 attorneys in Manhattan sat down to discuss legal strategies and techniques for a potential client – who purposefully hoisted a series of red flags - for laundering tainted, corrupt profits into the United States. The New York Times published a similar story. Although the formation of a domestic or foreign captive insurer was never mentioned by name in either piece, both stories are a reminder of the importance of ethical conduct within the captive industry.

The CBS segment – largely shot with hidden cameras by the international non-profit Global Witness – showed German-accented man acting as a financial consultant for a potential client who was a mining minister of a west African nation. Global Witness was able to secure consultations with 16 lawyers in Manhattan, even though the consultations were set up by reading from a script purposefully designed to set off a number of red flags.

The representative of the potential client disclosed that the Mining Minister earned a salary similar to a teacher in the United States, but sought to transfer substantial sums – possibly over $300 million – into the United States in order to purchase real estate, a $10 million brownstone apartment, a Gulfstream jet, and commission a yacht. This money was “earned” by the fictional minister by awarding non-U.S. foreign mining companies favorable mining concessions in Africa.

Out of the 16 separate lawyers which were shown on hidden camera, only 1 attorney refused to continue the conversation with the potential client after a few minutes. Some of the attorneys seemed delighted at the prospect of the new client, and even began to discuss fee arrangements. The remainder of the attorneys, suggested 60 Minutes, gave general legal advice on the ways “that the suspicious funds could be moved into the U.S. without compromising the minister’s identity.”
This included setting up a series of shell companies, both domestic and offshore or in European domiciles such as the Isle of Man or Lichtenstein, the use of straw men, the avoidance of large international (and regulated) banks, and the use of individual or small partnership money managers who are less concerned about corporate reputation. At one point, an attorney advised setting up a complicated transaction and then doing a test with an expendable amount of money – perhaps only $1 million – so that “if anything goes wrong, it’ll be painful, but it won’t be life threatening.” Another advised that it would be important to avoid banks and countries that are “vigilant about money laundering.”

The Global Witness report, and the accompanying 60 Minutes segment and NY Times story, are turning a bright light onto legal ethics. Only 1 out of 16 attorneys ended the consultation because of the red flags. Two others specifically told the potential client that, if they did go forward with the representation, “if [they became] aware that a crime was being committed, [they] have an obligation to report that.” That obligation stems from New York State Bar’s Rules of Professional Conduct.

Professionals in the captive insurance industry should always be aware of the same types of clients. In the investigation, the potential client even used the word “bribes” at one point, to describe how the funds were originally obtained. The red flags included:

Government officials in the position to accept bribes;

An intense desire for secrecy;

No seemingly legitimate source of the income (recall that the potential client only earned a salary equivalent to a teacher in the United States, yet sought to purchase a $10 million brownstone);

A requirement to move the money from where the corrupt proceeds were obtained (Africa) to where they can be enjoyed (the United States);

The need for a number of financial intermediaries and professional assistance (rather than simply depositing the money into a large international bank).

Although there are no reported instances of captive insurance companies being used for money laundering, if the industry wants to continue building its reputation as a legitimate risk finance tool, it must remain vigilant about the potential for abuse. Towards that end, domestic state regulators typically already have the statutory authority to oversee the licensing and operation of captive insurers. Working hand-in-glove, captive professionals need to also be aware of the red flags raised above.

Similarly, the North Carolina Captive Insurance Association has adopted an aspirational Code of Professional Conduct. That Code has several canons of conduct which would apply if the fictional African mining minister or his representative appeared in your office. Canon 2 states that “[c]aptive professionals must not willfully violate any laws or regulations, in both their personal conduct and in their advice to clients. Captive professionals should be familiar with the laws of the domiciles where they advise clients and operate captives, as well as applicable federal law. Captive professionals should avoid conduct or activities that are reasonably certain to cause unjust harm to others.” Underlying this ethical canons is the commentary that professionals should conform their conduct to the policies, rules, laws, and regulations within the applicable jurisdiction; should not seek to aid, abet, or assist a client in the commission of a felony; and should not allow personal financial gain (the prospect of earning a large fee) from interfering with professional judgment and adherence to the law.

Most importantly, captive professionals should simply be aware that unscrupulous individuals are moving within the American economy and seeking professional assistance in the laundering of large sums of tainted money. No captive professional wants to be the focus of the next hidden camera investigation. For the good of individual professional reputations and for the good of the industry, professionals should be aware of the hallmarks of money-laundering, consider ethical codes of conduct, and apply common sense to any potential new client or proposed transaction.